The Zacks Real Estate – Development industry constituents are poised to benefit from the recovery in demand for a number of real estate property types, easing of supply chain constraints and a slowdown in the pace of new deliveries, placing players like The Berkeley Group Holdings plc BKGFY, Green Brick Partners, Inc. GRBK and Forestar Group Inc. FOR well for growth.
However, the prevailing high interest rate environment and tight credit conditions are likely to weigh on the industry constituents’ performance as investors continue to delay the timeline of their transactions, awaiting better price discovery. Also, macroeconomic uncertainty and geopolitical unrest might add to the woes.
About the Industry
The Zacks Real Estate – Development industry comprises companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.
What's Shaping the Future of the Real Estate Development Industry?
Demand Revival for Certain Asset Classes Gives Scope for Growth: Demand for certain real estate categories such as residential, industrial and logistics and retail are witnessing a rebound. Particularly, the residential market is experiencing renewed demand, with builders focusing on building more affordable homes equipped with additional upgrades. Simultaneously, they are offering incentives to lure buyers. Meanwhile, the e-commerce surge and supply-chain strategy transformations are driving growth in industrial and logistics real estate. Further, the post-pandemic resurgence in consumers' preference for in-person shopping is propelling retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. This optimistic trend is expected to persist, positioning real estate development players for growth in the foreseeable future. Therefore, despite a generally subdued demand for commercial real estate, these categories are raising hopes and prospects for investors.
Constrained Supply Helps Industry Fundamentals: Macroeconomic uncertainty and geopolitical unrest have consistently caused disruptions in the supply chain across multiple stages in recent quarters. This, coupled with high interest rates, pushed up the cost of raw materials, consequently slowing down the pace of new construction deliveries. Particularly, the residential market is grappling with a substantial shortage of new homes, stemming from more than a decade of under-building compared with population growth. Additionally, the existing home supply is constrained as current homeowners are hesitant to sell and reluctant to give up their low-interest-rate mortgages. Therefore, despite a resurgence in demand, this supply shortage remains a key factor in maintaining favorable industry fundamentals.
Elevated Interest Rates Continue Impacting Business Sentiment: Although the Federal Reserve kept interest rates unchanged in its last few meetings, we notice that buyer sentiment has still not regained its full form due to the prevalent high interest rate environment. While some investors are striving to make the best out of the present market conditions, a prevalent cautious stance persists among many. This cautious approach has resulted in a delay in closing timelines for several transactions, leading to a decline in deal volumes. In addition, tight credit conditions have further hindered the situation. Given the current skepticism with respect to the timing of rate cuts, we expect the present market conditions to persist in the foreseeable future. As a result, the possibility of a substantial turnaround in commercial real estate investment activity taking place seems murky.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #111, which places it in the top 44% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. For 2023, the industry’s earnings estimates have moved 10.9% north in the past year. Moreover, the industry’s earnings estimates for 2024 have been increased significantly over the same time frame.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector over the past year.
The industry has declined 3.6% during this period against the S&P 500 composite’s increase of 17.1%. The broader Finance sector has rallied 7.4%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 4.82X compared with the S&P 500’s 20.19X. The industry is trading below the Finance sector’s forward 12-month P/E of 14.97X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Over the past five years, the industry has traded as high as 29.94X and as low as 3.43X, with a median of 9.35X.
3 Real Estate Development Stocks to Buy
Forestar Group Inc.: This is a majority-owned subsidiary of D.R. Horton, which focuses mainly on investing in land acquisition and development to sell finished single-family residential lots to local, regional and national homebuilders.
Forestar Group is likely to benefit from the strong demand for residential lots, particularly at affordable price points. There is a solid demand for new construction, with demographics providing support, even amid high mortgage rates and inflationary pressures, while the supply of new and existing homes at affordable price points, as well as resale properties, remains limited.
Also, with low net leverage and a strong liquidity position, FOR remains well-poised to navigate any challenges and bank on growth scopes.
Forestar Group currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its fiscal 2024 EPS has been revised 20.2% upward to $3.93 over the past month.
Also, the Zacks Consensus Estimate for fiscal 2025 EPS has been raised 8.4% over the past month. The company’s shares have rallied 20.2% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Berkeley Group Holdings plc: The company engages in residential-led property development focusing on urban regeneration and mixed-use developments in the United Kingdom. The Berkeley Group Holdings plc is headquartered in Cobham, the United Kingdom.
Despite the uncertainty in the market, Berkeley, with unrivaled land holdings in the United Kingdom, is poised to benefit from the under-supply of new homes.
BKGFY sports a Zacks Rank #1 at present. The Zacks Consensus Estimate for fiscal 2024 EPS has been revised 4.7% upward to 89 cents over the past month. The company’s shares have rallied 18.3% in the past three months.
Green Brick Partners, Inc.: This is a publicly traded, diversified homebuilding and land development company operating in Texas, Georgia and Florida. It is engaged in all aspects of the homebuilding process, including land acquisition and development, entitlements, design, construction, marketing and sales for its residential neighborhoods and master-planned communities.
GRBK enjoys several strategic advantages, such as a significant footprint in markets with some of the biggest job growth and best demographics in the United States, superior land and lot pipeline and diversity of its product lines, which bode well for its growth.
Particularly, with superior infill and infill-adjacent locations in high-growth markets, GRBK is likely to continue to benefit amid the persistent low supply of existing and new home inventory in its markets.
Analysts seem bullish on this Zacks Rank #2 (Buy) company. The Zacks Consensus Estimate for its 2023 EPS has been revised 1.5% upward to $6.26 over the past month.
Also, the Zacks Consensus Estimate for 2024 EPS has been raised 3.1% over the past month. The stock has appreciated 18.8% in the past three months.
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